Estate Planning 101: An Introduction to Some Basic Terms

Someone has probably told you that you need to have an “estate plan.” That is all well and good, but what exactly is an estate plan? You may have heard of the terms “will,” “living will,” “trust,” “power of attorney,” and “healthcare power of attorney,” but what do each of these terms mean and do you need one? While the answer to the latter of these two questions differs from one individual to another and is a good subject to discuss with a qualified attorney of your choice, I have provided below a brief explanation of the meaning of some of the more common estate planning terms you may encounter when planning for your future.

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What is a will? A will (sometimes referred to as a “last will and testament“) is a legal document by which a person (sometimes referred to as the “testator”) directs how his or her property is to be distributed upon death. If a person dies without a will, the “intestacy” laws of the state in which that person is living when he or she dies, or where that person’s property is located, generally governs the distribution of the individual’s property. Additionally, when a parent dies without a will and leaves minor children who have no other living parent to take care of them, the laws of the state of the children’s residence generally determines who will care for those children. Having a will allows an individual to take charge of managing how his or her property is to be distributed at death, and it provides an avenue for parents to nominate caregivers (typically referred to as guardians) for their minor or otherwise dependent children and conservators over any property those children possess or inherit. For at least these two very important reasons, EVERY ADULT SHOULD HAVE A WILL, unless you prefer to have your state government make all decisions concerning your property and the care of your loved ones after you die. A will is oftentimes the starting point and foundation of an individual’s overall estate plan.

What is a living will?Contrary to common perception, a living will is very different from a last will and testament and has nothing to do with the disposition of the testator’s property. A living will is a legal document that allows a person to express his or her wishes as to what end-of-life or life-prolonging medical care the person wishes to receive if he or she becomes incapacitated or unable to communicate and is suffering from a terminal condition, is in a persistent vegetative state, or is in an irreversible comma. A living will is sometimes referred to as an advance medical care directive.

What is a trust? A trust is a method by which an individual (known as the “trustor,” “settlor,” or “grantor”) transfers title to specific property to a person or entity (known as the “trustee”) who holds and manages the property for the benefit of one or more specified individuals or entities (known as “beneficiaries”). Typically, a trust is governed by a written document know as a trust agreement. The trust agreement often designates who is to serve as trustee, specifies the beneficiaries of the trust, and provides rules regarding how the trust property (sometimes referred to as the “trust estate”) is to be managed and distributed to the beneficiaries. A trust agreement can provide for the distribution of assets during life or after death by outright distributions, creation of new trusts, or by pouring property over into other trusts.

A trust can be revocable or irrevocable. A revocable trust (often referred to as a “revocable living trust“) is, as its name implies, a trust that can be terminated at any time during the lifetime of the person who created it. Unless and until revoked, the trust operates during the lifetime of its creator and may continue in effect after the creator of the trust dies. With a typical revocable living trust, the creator of the trust retains full management and control of the property transferred into the trust by acting as the trustee or co-trustee (usually with his or her spouse) of the trust, and it is not uncommon for the creator of the trust to also be one of the beneficiaries or the sole beneficiary of the trust during his or her lifetime.

An irrevocable trust is a trust that, once created, cannot be terminated by its creator. Thus, once property is transferred into an irrevocable trust, that transfer is permanent. This result differs from a transfer of property to a revocable trust in that the creator of a revocable trust can remove the property from and terminate the trust at anytime during his or her lifetime. Unlike a revocable trust, the creator of an irrevocable trust generally does not serve as the trustee of the trust and is not a beneficiary of the trust.

Trusts are often used as vehicles for allowing property to pass outside of the probate process, to insulate property from the reach of creditors, and for tax planning purposes.

What is a power of attorney? A “power of attorney” refers to a legal document by which a person (known as the “principal”) provides another person (known as the “agent”) with authority to act on behalf of the principal. With a “general” power of attorney, the principal gives the agent complete authority to act on behalf of the principal in a wide variety of situations, including personal finances, the purchase and sale of real and personal property, and business transactions. With a “special” power of attorney, the principal gives the agent authority to act on behalf of the principal only for the purposes specified in the power of attorney document. A power of attorney can have a specific beginning and ending date, or it can be a “durable” power of attorney, meaning it only ends when the principal dies or revokes it. A durable power of attorney, if not previously revoked, remains effective even after the principal becomes disabled or incapacitated.

What is a health care power of attorney? A healthcare power of attorney is a legal document that allows a person (known as the “principal”) to provide another person (known as the “agent,” “surrogate,” or “health care representative”) with authority to make future health care decisions for the principal if the principal becomes too ill or cannot make those decisions for himself or herself. The principal can specify in the healthcare power of attorney document the exact types of healthcare decisions the agent is authorized to make for the principal. In Arizona, a separate mental health care power of attorney can also be executed by the principal to appoint and give authority to an agent to make mental health care decisions for the principal in the event the principal is unable to make those decisions for himself or herself.

For further information about any of these estate planning vehicles or to discuss your own estate planning needs, we invite you to contact the attorneys at Smith LC.